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Asia Passive Funds Face Stiffer Fee Competition

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As more fund managers in Asia embrace exchange-traded funds (ETFs) as part of their product portfolios, growing competition is putting pressure on fees, according to according to the latest issue of The Cerulli Edge – Asian Monthly Product Trends published by Cerulli Associates. Around the region, there are now signs of the race to lower fees typically seen in larger and more developed ETF markets such as the US.  

In the Asia Pacific region, this downward trend is particularly notable in South Korea, where ETF fees stood at a weighted average of 0.20% in 2020 lower than other key markets in the region, according to Morningstar data. Competition has also been intensifying in China’s ETF market. In March 2020, 12 fund managers were reported to have negotiated with index providers to bring down their index licensing fees for 40 equity ETFs, to give them some profit buffer. In the early part of January 2021 alone, 10 ETFs adopted a model of 15 and five basis points for management and custodian fees, respectively.

For some ETF issuers in the region, slashing their fees on less profitable products is one way to popularize their brands. These products tend to be broad market ETFs or lower-fee versions of fund managers’ core ETFs. Some issuers make up for this fee-cutting by earning more from ETFs with higher fees. Others stay competitive by aggressively pursuing inflows through marketing.

Whatever their strategy, the reality is that managing ETFs comes with a cost. Besides paying for salaries, technology, and distribution, fund managers must spend to list on an exchange and to track a certain index. Some issuers list on a few to several exchanges to attract more inflows—requiring additional costs from paying annual fees.

Incumbent fund managers often end up cannibalizing their products by bringing out ETFs that compete with their active funds. This can adversely affect their revenues, especially if their active funds fail to outperform.

The tendency of ETFs to have low profit margins makes volume critical to reach profitability. Normally, fund houses in more established markets aim to attract $100 million in assets under management (AUM) to make managing an ETF sustainable. But as the ETF space becomes more competitive, it generally becomes harder to attract flows to new funds. This forces issuers to close and liquidate ETFs with small AUM.

Ken Yap, Cerulli

ETF closures not only adversely affect investors, who are forced to prematurely pull out their money and pay a fee to invest it elsewhere. Such closures might also drive investors away from smaller providers to larger and more established ones that are less likely to close their funds. Eventually, this could further solidify the dominance of major ETF issuers and make it harder for smaller players to compete.

“Cerulli expects fund managers to emphasize improving their product mix to include higher revenue-generating products,” said Ken Yap, managing director, Asia at Cerulli Associates. “At the same time, many will continue to embrace passive funds and run them alongside active products. So, striking a healthy balance between active and passive products will be even more important. Fund managers would be well advised to avoid cannibalizing their own products while ensuring their ETF business models are sustainable.”